The Virtues of Europe and Hated U.S. Stocks

If you ever needed proof that a region’s stock performance often doesn’t jibe with its economic prospects and portrayal in the financial media, check out Europe.

Press accounts in recent weeks have described Europe as a global poor man that can potentially contribute to eroding stock performance in the U.S. And no doubt, the economic numbers are troubling enough that the European Central Bank is taking steps to create liquidity at a time when the Federal Reserve is moving in the opposite direction.

So how is it that Stoxx Europe 600, a proxy for large-, mid- and small-capitalization stocks across 18 European countries, hit a seven-year high in recent days?

As Dana Lyons, a money manager and partner with J. Lyons Fund Management, explains in his blog, “While there are certainly trouble spots around the continent (e.g., the PIIGS as we have pointed out), there are apparently enough bright spots (such as the Northern European markets that we have discussed) to boost the Dow Jones STOXX Europe 600.”

Dana Lyons Blog

Lyons, applying technical analysis to the matter, thinks the verdict is still out as to whether this index can continue to reach new highs.

What’s clear is that the European stock market, taken as a whole, is doing a lot better than you might think if you haven’t been watching the stocks closely.

Meanwhile, contrarian investors have long believed that analyst opinions of a stock often serve as a counter indicator of how that stock will perform in the future. That thinking has received a vote of support by Brett Arends, a personal-finance writer with MarketWatch, and he has the facts to back it up.

In a recent column, Arends points out that anyone choosing a basket of stocks with the greatest percentage of sell recommendations relative to buys outperformed the Standard & Poor’s 500 in recent years.

MarketWatch

“One of the smartest things you could have done over the past seven years was to invest in the 10 stocks that Wall Street analysts liked least, on the first trading day of the new year,” writes Arends. “Since Jan. 2, 2008, that strategy would have turned $100 into about $270, compared with about $170 for someone who just bought and held the S&P 500 Index, excluding trading costs and taxes.”

As Arends puts it, this winning formula is “more than happenstance. The stocks that everyone hates are often underpriced in relation to their fundamentals. Their stock prices are artificially depressed by the institutional and psychological biases of Wall Street, which lead too many investors to think and act as a herd.”

Arends’ column supplies a list of the “most hated stocks for 2015.” Perhaps not surprisingly, it includes a few oil-services names such as Diamond Offshore Drilling (ticker: DO) and Transocean ( RIG). But the list also includes names in other sectors, including Con Ed ( ED) and Campbell Soup ( CPB).

I’ll close with a couple of articles about the folly and contradictions of market forecasting. I don’t think much of professional stock soothsayers and certainly wouldn’t build an investment strategy around the pronouncements of anyone with the temerity to divine the future.

“Human beings, in general, stink at predicting the future,” he writes. “History shows us that people are terrible about guessing what is going to happen — next week, next month, and especially next year.”

Ritholtz’s advice to investors is to “have a well-thought financial plan that is not dependant upon correctly guessing what will happen in the future. Have a broad asset allocation model that is mostly passive indexes. Rebalance once a year. Reduce the useless, distracting noise in your media diet.”

The irony is that if investors take Ritholtz’s advice, they should have little to no need for his daily diet of investment insights.

First of all, there is no such thing as “passive investing,” he writes. “Picking an asset allocation is, by definition, active investing.”

“If you tell me to own a total stock market fund over the next decade (or any index fund, for that matter) you are making a forecast about what sort of return you expect it to generate over that time,” he adds. “Clearly, you wouldn’t tell me to own this sort of fund if you believed that stocks were likely to fall 40% over the coming decade . . . No, you believe that I will likely receive a positive return, after inflation, or why take the risk of owning equities at all? It’s a forecast, plain and simple.”

Felder concludes: “At the end of the day, then, trashing forecasters is simply a way of saying that their forecast is not as valuable as yours. And if you want to make that argument then I’d like to know why you think yours is better rather than just bashing the other guy’s.”

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